I entered into crypto late 2017, at the peak of the bull market. During that period of crypto, having a token was the fashionable thing to do. Equity was heavily frowned upon. However since then the narrative has oscillated more than I would have imagined. Here’s a recap:
-
Late 2017/early 2018 = tokens are the new equity
-
Late 2018 = tokens are a scam, equity is the safest path
-
Early 2019 = tokens may be good in some cases, although don’t do it unless you have to
-
Mid 2010 = if you don’t have a token, expect legal issues, issues providing liquidity to investors and a non-competitive advantage
A lot of the above is pretty anecdotal from my experiences running my own startup, to today, as I speak to investors in the space. However, apart from startups raising on tokens, you now have a whole new set of asset classes being created from in game items, real world items and people!
The ICO Fair
For those of you weren’t fully aware how the 2017 machine worked, here’s a quick primer.
-
A team of people come together with the intention to raise money for some venture. The idea of the venture has much more weight than actual execution capabilities or any other risks.
-
The idea was put into context as if blockchain would revolutionise the planet and those that got in early would see upwards of 100x returns
-
Once the idea was locked down, a white paper was written to formalise the idea in a bit more detail. In order to make the team more credible, advisors with impressive names were added onto websites as a way to show social proof. Vitalik as an advisor meant you sold out instantly.
-
From here, the “rounds” began. Seed would get in at a low price such as $0.01 with the private round going for $0.10, pre sale going for $0.50 and public sale for $1.00
-
The seed round was done to raise enough money to pay for marketing and travel costs to go to the next round. Marketing for the public sale would cost in the hundreds of thousands, if not millions.
-
Tokens would list on an exchange (making a killing in the process), and early insiders would take an exit leaving later sellers with overpriced bags
-
However, in some cases the token would then do 10x-100x multiples of it’s listing price as well. This last step is what kept the casino going for even the most normal investors
Okay so now that we’ve got that out of the way, let’s talk about the various parties and what made all of this so exciting for each party:
-
Teams: raise capital from anyone, anywhere with no shareholders dictating how to execute
-
Early investors: low capital amounts to high exit amounts in a very short period of time
-
Exchanges: providing technology to enable the speculators to speculate
-
Marketers: charging large sums of money to make the maximum amount of noise possible
-
Retail investors: investing in “credible” teams and projects with the due diligence of early investors, advisors, marketers and exchanges
-
Developers: large treasuries needing development talent to execute on ideas causing “blockchain developer” to be real, paying job
The whole model only works, if all the various parties come together to play this co-operative game. However, as prices started falling due to not enough new capital speculating we saw the crypto macro market fall as a whole from the sky to the depressing ground. After the fall out, a very strong distaste for tokens began to grow with everyone in the ecosystem. Saying you had a project and a token was almost akin to saying “I’m a scammer”. Not even kidding.
I personally believed that 2017 was a prototype of the future, it was just uncertain as to what it would be a prototype of. Looking back, the key things we learned in 2017:
-
Representing value as an ERC20 token is incredibly powerful as it gives a trading engine that otherwise takes a lot of infrastructure
-
Token interoperability inside financial protocols means that anything can be rented, borrowed or controlled by code
-
Speculation is a powerful use case that will always persist, contrary to the ethical issues with banking on it as a use case
The Upcoming Future
DeFi is great (coming from someone who writes about it a lot), although it lacks the ease of understanding and returns compared to a speculative ICO. We’re slowly seeing the birth of the same dynamics which made 2017 ICOs so popular, but this time in a different, more interesting form. The upcoming 3 categories are what I think provide a glimpse, each with various upsides and downsides:
Initial Game Offerings
Games are more like production houses than startups as they have high capital requirements in order to make all the needed assets and acquire users. Gods Unchained is a great example of this, their first game (before Gods Unchained) allowed them to raise $2m directly from their customers for the pre-sale of in game assets. No dilution, capital available from anyone/anywhere/anytime. Tokens can be speculated on before the game itself goes live and is a form of engagement in itself. There is currently no player that enables initial game offerings as a service and providing the support needed to games.
Good:
-
Allows game creators to raise before spending on production
-
In-game items have real utility and have demand based on the stickiness and engagement of the game
-
Very good regulatory framework as assets are strictly pre-sales for in-game assets
Bad:
-
Not legally enforceable for teams to deliver
-
Quality of product may not meet expectations
-
Secondary market liquidity can be hard to bootstrap if they’re NFTs
Initial Item Offerings
Started off by the Uniswap team for a pair of socks – $SOCK. The idea: a pair of socks that follow a curve making each pair of socks more expensive than the one sold before it. Price is set by a mathematical curve where the last few socks are almost 10x-30x more expensive than the first pair sold! It’s the same ICO game in 2017 but for something more tangible and exciting to speculate on since each person that purchases near the end can brag about buying a sock for $200 and in turn get more people to buy in.
Zora is the latest pioneer in this space by using high profile celebrities and artists to tokenise their items. Their recent collaboration with award winning grammy artist RAC resulted in his $TAPE (a real cassette tape for his new album) reaching an all time high of $929. I predict many competitor platforms will emerge in this space as it gets more traction and we see speculation of each asset turning into a valuable marketing exercise for the platforms that rise in this category.
Good:
-
Based on real world items and value proposition is very clear
-
Can allow creators to raise capital before going into productions
-
Very good regulatory framework as assets are strictly pre-sales for real world assets
Bad:
-
Scalpers can drive up prices and make money without adding any concrete value
-
Fans end up paying much more than needed
-
Still inaccessible due to only being available to those with crypto
Initial Person Offerings
Pioneered by Matt Vernon for tokenising 1 hour of his time by the $BOI token. Social tokens are the latest offering on the block which are becoming more interesting. Alex Masmej evolved this experiment by incorporating an income share agreement into his token, where holders would get a portion of his income for the next 3 years. I decided to take this a step further by tokenising myself for my time, but then also incorporating governance and token burns (5% of this newsletter’s revenue). Roll is the pioneer platform with majority of high profile offerings being launched on their platform.
Good:
-
Can allow a new segment of fundraising before a company is started and allow believers to tie their success closer to said person
-
Create communities around individuals that can be leveraged to benefit both creators and fans
Bad:
-
Enforceability is not legally binding and no clear legal structure
-
Amount raised can only be a certain amount due to outsized legal risks as the amount raised increases
Closing
All of the above are interesting as they can be done today, with no extra technology. The only thing required for adoption is easy payment rails to add all of the above which is starting to take off (Dharma already has a $250 no KYC limit and a little birdie has told me other teams have been able to get higher limits).
It’s interesting as I’ve been able to get a really good glimpse into all three of the above categories first hand and I can think of it being nothing but bullish. There’s two plays going on which will be worth keeping in mind.
-
Platforms that enable these new breed of offerings to be more accessible to regular people/industries. Each category has first movers which may end up flourishing in the next bull run to kinds of companies we haven’t really seen before.
Key milestones: a platform has an ecosystem that reaches a total of $100m+ in liquidity.
-
Creators/users that leverage these platforms to reap benefits of the value they create in whatever community/ecosystem they participate in. We’ve seen early success here in every category, the next bull run will scale this to thousands (or even millions)!
Key milestone: a creator/item/person reaches a market cap of $1m+
Whether you like it not, but enabling everything with value to be speculated on will be the biggest use case of Ethereum in the coming years. Many in the Ethereum community seem to be very harshly against this due to the scars of 2017. In my eyes this view seems to be very shortsighted and limits the possibilities of innovation that may spring up. However the bit about which makes Ethereum amazing is that anyone can innovate, regardless of what it is for or who they are.